March 12, 2017

March 11, 2017

The market has slipped into a choppy, sloppy affair as the indexes sway back and forth. Meanwhile, the action in individual stocks continues to present investors with little in the way of meaningfully profitable set-ups, although there is the occasional upside surge among some of the names on my long watch list, as we will see later in this report.

The S&P 500 Index acts similarly to the Dow Jones Industrials Index as it rallies back up into its 10-day moving average on light volume that was -8% lower than the prior day’s levels. After a multi-day downtrend, the index so far looks like it is engaging in a simple reaction bounce. The index ended Friday where it began after gapping up at the open on a strong jobs report, then selling off into the red before finally sliding back to the upside by the bell.

What I find most telling about the action of the index, along with the other majors is that the big breakaway gaps to new highs seen in these indexes two Wednesdays ago failed to break away. Instead the indexes quickly lost momentum and slid back to the downside, putting them back into their current choppy price ranges.

The NASDAQ Composite Index regained its 10-day line on Friday with volume coming in about 3-4% lower according to IBD, but my eSignal chart below shows higher volume. Nothing like having consistent data sources to guide you! But whether the volume was higher or lower, the uneven underlying action is perhaps underscored by the fact that the index closed below its opening gap-up levels in a big round-trip sort of churning day.

The net result for the week is that the index tracked sideways in what is something of a choppy, indecisive price range over the past two to three weeks. Meanwhile, individual stocks seem to mirror the action of the indexes, with some leaders breaking down while others continue to hold up, at least for now.

Oils remain the weakest area of the market currently, but we can see how short-sale target Diamondback Energy (FANG) undercut its prior February low on Thursday, triggering a logical undercut & rally move back to the upside. This brought FANG right up into its 10-day moving average, where it was shortable at the open, and it then turned back to the downside on heavy selling volume. I would continue to view rallies back up into the 10-day or 20-day moving averages as shortable moves, using the moving averages as your standard guide for an upside stop.

Both Parsley Energy (PE) and Rowan Companies (RDC), not shown here on charts, are now living underneath their respective 200-day moving averages. Optimally I might consider shorting moves back up into the 200-day lines at 32.53 for PE and 16.47 for RDC.

The optical space turned into a gooey mess this week with both Ciena (CIEN) and Finisar (FNSR) blowing up after their respective earnings reports on Wednesday and Friday. You don’t get much uglier than FNSR’s massive-volume gap-down on Friday which would have qualified as a shortable gap-down once it set its intraday high at 29.41.

With the stock undercutting the prior January low and sitting just above the 200-day moving average, I would expect some sort of reaction bounce from here. This could set up a shortable rally, but I doubt that any such rally would get as far as the 50-day moving average. Any bounce would likely be short-lived. For that reason, short-sellers should simply watch their 620 chart for any intraday reversal on a reflex move to the upside.

Applied Optoelectronics (AAOI) and Arista Networks (ANET), not shown here on charts, continue to hold up not too far off their currents highs. In both cases I would simply use the 10-day moving averages as tight selling guides, although with respect to AAOI I might consider taking at least partial profits given how far the stock has come in 2017.

As CIEN and FNSR blow apart, Lumentum Holdings (LITE)¸ another opticals leader, remains in a compromised position here along its 20-day moving average. As I wrote over the weekend, the stock could become shortable here if it fails at the 20-day line and the top of its recent base breakout. Notice how the stock undercut the prior February low in the pattern on Thursday and then rallied up to the 20-dema in a temporary undercut & rally move. That came to an end on Friday as LITE churned around and just below its 20-dema on above-average selling volume.

This is sitting right on the fence as I see it, and could be considered shortable here using the 20-dema as a guide for a tight upside stop. I would keep a close eye on AAOI and ANET since if they begin to come in it could trigger further weakness in LITE. So far LITE is still holding above its prior breakout point, but the potential for this to resolve bearishly is a distinct possibility.

Over in the misty land of Chinese stocks, Momo (MOMO) looks to be running into some heavy selling after a bit of a climax move on Wednesday following earnings. My tendency would have been to sell into Wednesday’s huge move and lock in profits.

I first discussed this as a buyable set-up way back in early January when the stock was trading around 18-19, and this obvious gap-up breakout is likely something to sell into rather than buy into at this stage. However, the critical price level is the intraday low of Wednesday’s gap-up move at 29. If it breaks that then the stock could easily morph into a later-stage base-failure situation. For now, it is a matter of seeing how it evolves from here.

Netease (NTES) is sitting right on its 20-day moving average and should be watched for any breach of the line which would trigger the stock as a short-sale target at that point. On the other hand, we must remain objective here, and understand that volume has continued to dry up along the 20-day line, so there is always the possibility that NTES could hold support at the 20-day line and rally.

How this resolves will likely depend on what the general market does as we head into Wednesday’s Fed policy announcement. So, NTES can be viewed as sitting on the fence right here. I would say be ready to play this either way depending on the general market context and the stock’s real-time evidence.

Alibaba (BABA) looks constructive as it runs along its 20-day moving average with volume drying up on the daily chart. But again, here we have a leading stock that had a buyable gap-up move following earnings in January but has gone nowhere since. Notice also that BABA is building what looks to be a handle to a large, six-month cup-with-handle formation, but the handle is showing some wedging action along the lows. Normally, a handle should drift to the downside slightly as volume dries up.

Whether this action is a warning sign or not remains to be seen. I suppose that as long as BABA can hold the 20-dema with volume drying up, then it could be considered buyable until and unless a volume breach of the line occurs.

Weibo (WB) contrasts with the other China Five names and remains a short-sale target as I discussed in my Wednesday mid-week report. On Thursday, the stock broke below its 50-day moving average on heavy selling volume. It has now failed through both of its prior double-bottom and new-high breakouts, the 20-day line, and the 50-day line.

The only way WB could get any uglier is by moving lower toward its 200-daymoving average, which is starting to look like a definite possibility. For that reason, I would now use any rallies up to the 50-day line at 49 as short-sale entry points. The 20-dema at 50.38 might then serve as a guide for an upside stop since the stock could, in the off chance, rally that high on any reaction bounce from here.

JD.com (JD), not shown here on a chart, continues to hold above its 10-day moving average and near its highs. However, I would be inclined to either take partial profits here or use the 20-day moving average at 30.35 as a maximum selling guide. That would ensure that anyone who bought closer to 25, when I first started discussing the stock three months ago, would retain their profits.

The Chinese and optical names seem to reflect the general market situation as it pertains to individual stocks. We see some names in both areas acting okay, although some may be on the verge of rolling over, while others blow apart. This is one reason why I remain highly cautionary on this market currently as it roils about.

And the fact that big-stock leader Netflix (NFLX) is now living below its 20-day moving average doesn’t make me feel any more sanguine about this market. And we might also consider that the stock has gone absolutely nowhere since its January buyable gap-up (BGU) after earnings. That’s over two-months of nothing for anyone who bought into that BGU.

In fact, the stock just keeps looking more and more like a short-sale target right here using the 20-dema as a guide for an upside stop. We know that when stocks begin to fail following a buyable gap-up there are two reference points that help determine any imminent failure. The first is the stock’s ability to find support at the 20-dema, which in NFLX’s case has been compromised. The second would be a breach of the 138.25 intraday low of the prior January BGU, so that is something to watch for.

Facebook (FB), Apple (AAPL), Alphabet (GOOGL), Amazon.com (AMZN), and Priceline Group (PCLN), none of which I show here on charts, are all hanging near their highs. In each case, breaches of their 10-day moving averages are yet to occur, so they remain constructive for now. But only AMZN is in what I would consider a lower-risk entry position since it sits right on top of its five-month base breakout of late February.

For newer members: Please note that when I use the term “20-day moving average,” “20-day line,” or “20-dema” I am referring to the 20-day exponential moving average. I use four primary moving averages on my daily charts: a 10-day simple, 20-day exponential, 50-day simple and 200-day simple moving average.

Among names I’ve discussed on the long side, these continue to look okay, although not all are in what I would consider lower-risk entry positons. Below are my notes on these stocks still on my long watch list, some with charts, some without:

Activision (ATVI) is extended to the upside as it continues to make higher highs on light volume. This might imply that a pullback will occur soon.

Carnival Cruise Lines (CCL) looked like a short on Wednesday, but Friday the stock gapped to the upside after being pumped on a well-known financial cable TV show. That led to a base breakout on above-average volume, which could be considered buyable using the 10-day line at 56.10 as a selling guide.

Charles Schwab (SCHW) is still sitting on top of its 10-day moving average but still going nowhere after last week’s base breakout. Technically this is in a buyable position using the 10-day line at 42.02 as a selling guide.

Clovis Oncology (CLVS) has been a big winner for us in 2017, and I recently suggested taking profits in the stock and letting it set up again. Well it has spent the last month-and-a-half basing, and may be starting to turn again. This could be buyable here using the 20-dema at 60.53 as a selling guide.

Checkpoint Software (CHKP) is holding along its 20-dema as volume remains light. So far, this looks like it is trying to base after a nice run-up so far in 2017.

Electronic Arts (EA) has gotten further extended to the upside as volume comes in light. Pullbacks to the 10-day line at 87.88 would offer lower-risk entries.

Incyte Pharmaceuticals (INCY) streaked 11.22 points higher on Friday on rumors that Gilead Sciences (GILD) might be interested in acquiring the company, ending the day and the week at 149.24. INCY was already rallying after it was announced it would be added to the S&P 500 Index a couple of weeks ago. This remains a hold, using the 10-day line at 136.11as a maximum selling guide.

Goldman Sachs (GS) closed just below its 20-dema on Friday as selling volume picked up. I would not be doing anything with financials ahead of the Fed meeting since even a rate increase could be viewed as a one-and-done event, and the financials will likely be showing some heightened sensitivity to whatever wording shows up in the Fed policy announcement Wednesday.

Royal Caribbean Cruise Lines (RCL) tried to break out in sympathy to CCL on Friday, but volume came up short. It also did not qualify as a pocket pivot.

Symantec (SYMC) moved to another higher high on Friday on strong above-average volume. The 20-day line at 28.94 would continue to serve as a selling guide.

Take-Two Interactive (TTWO) pulled in slightly on Friday on above-average selling volume. I don’t see this as being in a buyable position just yet as it looks like it needs to spend more time setting up, if in fact it has further upside price potential.

Square (SQ) is now living below its 10-day moving average, but is still holding up above its prior 16.32 BGU low of February 23rd. The rising 20-dema is now at 16.28. I would prefer to take a shot at this on any low-volume pullback to the 20-dema, should that occur.

Veeva Systems (VEEV) moved back up toward its range highs around 45 on Friday on above-average volume, but the action did not qualify as a pocket pivot. Nevertheless, the stock is hanging tight along its 10-day and 20-day moving averages at 44.32 and 44.11, respectively, which could be used as tight selling guides if one chose to test this one out on the long side.

On the short side, Nvidia (NVDA) remains one of my primary short-sale targets, but the stock is starting to feel like it is running out of selling pressure, at least on a short-term basis. The stock has been hanging along and just below the prior base lows with volume drying up.

This would seem to imply that a rally back up toward the 50-day moving average at 106.61 is a distinct possibility. Given that NVDA is a late-stage failed-base (LSFB) type of short-sale set-up, I know from studying many examples of these that once it moves below the 50-day line it can have several rallies back up into the line before moving lower.

So, from here I’m inclined to lay back and see if a more optimal short-sale entry point shows up in the form of just such a rally back up into the 50-day line. Otherwise, if one believes a break to lower lows is imminent, then it could be shorted here using the 10-day line as an uber-tight stop in case it does reflex in more pronounced fashion back up to the 50-day line.

Tesla (TSLA) has moved further below its 50-daymoving average over the past two trading days, but selling volume hasn’t been heavy. It seems that intent sellers left the stock on the day after earnings, as evidenced by the high-volume gap-down price break off the peak back in February.

That downside break on heavy selling volume forms the right side of the head of a fractal head and shoulders formation. This looks fairly bearish, and while sellers haven’t hit the stock hard over the past five days, buyers don’t seem to be all that interested in taking shares either. I would think that the overhang of a potentially impending secondary stock or bond offering of some sort is keeping a lid on any reaction bounce in the stock.

I still consider TSLA to be shortable here with the convenience of using the 50-day moving average at 248.65 as a guide for a tight upside stop.

U.S. Steel (X) gave short-sellers all kinds of opportunities to get short the stock over the past couple of days as it flitted back and forth between the area just below the 50-day and 20-day moving averages. On both Thursday and Friday, the stock rallied back up to its 20-dema, but was shortable both times as the stock reversed to close down on the day.

I came in short the stock on Thursday morning, and the stock gapped down to 35.51 at the open and slid a little bit lower from there. At that point I was eyeballing the prior low in the pattern from late February as an undercut & rally cover point, so I bagged the profit and let the stock rally. It rallied with a vengeance, getting just above the 37 level by mid-morning on Thursday before becoming shortable at the 20-dema once again. It then reversed back to the downside and closed right at the 50-day line. That worked as a nice “double-dipper” on the short side.

On Friday morning X gapped up to the upper 36 price level at the open, where it was again shortable, and by the close collapsed back below the 50-day line. That led to its lowest closing low since failing on both of its attempted breakouts over the past month. So, what was a “double-dipper” on Thursday became a triple-dipper by Friday and certainly qualified as my best short-selling experience with any stock over the prior two trading days.

With the stock now under the 50-day line, I would still be on the alert for any random rallies back up to the 20-dema as potentially more optimal short-sale entries. But now the 50-day line at 35.69 comes into play as resistance and an optimal short-sale entry on any rallies back up into that moving average.

I must say that it is amazing to see how all the stocks that rallied furiously on the promise of infrastructure spending by the new Trump Administration have completely come apart. The big-stock materials names like MLM, VMC, and most recently EXP have busted to pieces, while the steels have all blown apart, and CAT is suffering from woes on several fronts, including a recent IRS raid.

Workday (WDAY) is sitting within a short bear flag and just along the confluence of the 50-day and 200-day moving averages on the daily chart, which I don’t show here. Optimally, a rally up to the 20-dema at 84.34 would offer the best short-sale entry point, although a volume breakdown below the 50-day/200-day moving average confluence would also trigger a short-sale entry at that point.

The weekly chart, which I do show below, reveals a Punchbowl of Death (POD) type of formation with a big-volume reversal and failure at the right-side peak. This looks fairly textbook, but we can see that the stock is holding along the red 40-week moving average. For this reason, I’d prefer to see a rally up to the 20-dema as a more optimal short-sale entry point. Most of these cloud names look vulnerable currently, as my notes on other short-sale set-ups will show below.

Keep in mind that I’m watching WDAY along with its other cloud brethren, including names like Splunk (SPLK), ServiceNow (NOW), and even Salesforce.com (CRM). I discuss SPLK and NOW below, but CRM is interesting given that it has had a tremendous, uninterrupted upside run since early January.

The stock has had a long run since the lows of January and has not spent any significant time consolidating those gains, which in my view is problematic. It could, of course, start consolidating at this point, but its failure to rally sharply following its recent earnings report could be a sign of tiring.

CRM therefore remains a fluid situation here, and one to keep an eye on if it correlates to further weakness in other cloud names. It doesn’t have to resolve bearishly, but often the action of a big-stock leader in a group showing several names within the group already weakening can serve as a catalyst for recover or breakdown. Therefore, the first clue to watch for here would be a volume breakdown through the 20-dema at 81.93.

Notes on other short-sale set-ups discussed in recent reports:

GrubHub (GRUB) is now working sideways in a five-day bear flag after becoming extended to the downside following last week’s reversal at the 200-day moving average. I would prefer to see a rally back up towards the 20-dema at 35.69 as a more optimal and opportunistic short-sale entry point if that were to occur.

ServiceNow (NOW) pushed up into its 20-dema on Friday on weak buying volume. This puts it in an optimal short-sale position using the 20-dema at 88.58 as a guide for a tight upside stop.

Splunk (SPLK) found support at its 10-week moving average on the weekly chart on Thursday, triggering a small rally on Friday back up towards the 20-dema. I would view any move to the 20-dema at \61.56 as a more optimal short-sale entry point.

Given all the media hoopla over the hot-gone-cold IPO Snapchat (SNAP), I thought it would be appropriate to close out this report with a discussion of the stock. SNAP was originally priced at 17, opened at 24 on the first day of trading, and then ran up to a peak of 29.44. When I saw the stock printing 29 two Fridays ago, I was sure I saw the word, “Suckaaaa!” printing right after it.

Whoever bought the stock in the after-market is now licking their wounds. SNAP closed Friday at 22.07, still about five bucks above its IPO offering price. But that puts it about 10% below its opening price and a long way below its 29.44 intraday price peak. One must ALWAYS give hot IPOs time to cool off a little bit and set up. In the process, deeply stung, impatient after-market buyers begin to feel the heat, and the crowd, including the media, begins to hate the stock. That seems to be the case with SNAP.

Objectively, we can see that the stock is now moving back down to its prior 20.64 low of this past Tuesday in a typical retest as volume declines sharply. Whether this turns out as a Wyckoffian Retest, where it holds above the low with volume drying up, or whether it turns out as a Wyckoffian Spring (what I called an undercut & rally set-up) where it undercuts the low and rallies remains to be seen.

But as the SNAP lovers turn to haters, and all the IPO flippers exit the stock, it could begin to form the lows of its first IPO base. Assuming SNAP doesn’t turn into another Facebook (FB) back when it came public in 2012, it could set up more like Line (LN) did back in July of last year. Study both stocks to get a sense of the possibilities.

And let us not forget that the market is always about possibilities. For that reason, I would not toss SNAP onto the ash-heap of failed IPOs just yet. The hype was palpable on this one to be sure, and the extreme hype is quickly vaporizing into extreme hate, but once the crowd is leaning too far one way or the other, that is when an opportunity can arise. Consider that SNAP options began trading on Friday, with put volume exceeding call volume by 3 to 1, per Zerohedge.com.

So, I would not make any assumptions about the stock based on all the bearish arguments we’re hearing currently now that the stock is coming back down to Earth. As Gordon Gekko said to Bud Fox in my all-time favorite movie, Wall Street, when Sir Larry Wildman was about to show up for a meeting at the Gekko family resident in the Hamptons, “Stick around, this could get interesting.”

The current market environment remains somewhat challenging. It has also taken on a bifurcated character, with some stocks developing into short-sales set-ups while others continue to base-build or act reasonably well. That said, if you’re long anything it’s hard to keep from looking over your shoulder wondering when another shoe is going to drop somewhere.

Friday’s jobs number came in well above expectations, keeping the probability of a Fed rate increase this coming Wednesday at a 91% probability. The question is whether the market (and financial stocks, a major factor in propelling the market higher in 2017) views this as the start of more to come or more of a “one and done” type of situation.

That will become evident in the reaction of financials and bonds once the Fed release their monthly policy announcement on Wednesday at 11:00 a.m. my time on the West Coast (2:00 p.m. Eastern). For now, my message remains as it was on Wednesday. Stay alert, and keep things tight, while experienced short-sellers can act upon short-sale set-ups if they move into optimal short-sale price points in real-time.

On an administrative note, I wanted to let members know that in the interest of being on the same page with all my Gilmo Report members, I currently have subscriptions to HGS Investor Software (my “weapon of choice” given its superiority as a technical tool and the fact that it has many built-in features based on my work), MarketSmith, StockCharts.com, and Telechart 2000. This way I can easily field questions regarding how my methods stack up on each system.

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions though positions are subject to change at any time and without notice.